Chile - Australia Double Taxation Convention is enacted

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On 23 July 2013, the Convention between the Republic of Chile and Australia for the Avoidance of Double Taxation (the Treaty) was published in Chile’s Official Gazette. The Treaty was signed on 10 March 2010.

The Treaty is in line with OECD Guidelines, including the following:

Permanent establishment (Article 5)

In addition to the traditional clauses under which an enterprise is deemed to have a permanent establishment (PE), the Treaty considers that an enterprise of a Contracting State will be deemed to have a PE when it carries on activities in the other State in the exploration for or exploitation of natural resources for a period or periods exceeding in the aggregate 90 days in any 12-month period. This includes the operation of substantial equipment.

The operation of substantial equipment will be deemed to be performed through a PE provided such operation lasts for a period or periods exceeding in the aggregate 183 days in any 12-month period.

In addition, when a person acting on behalf of an enterprise manufactures or processes in a Contracting State for that enterprise goods or merchandise belonging to the enterprise, such enterprise will be deemed to have a PE. An enterprise also will be deemed to have a PE when a person is acting on behalf of an enterprise – other than an agent of an independent status – and has and habitually exercises an authority to conclude contracts on behalf of the enterprise, the latter will be deemed to have a PE.

According to the Treaty protocol, a person who substantially negotiates the essential parts of a contract on behalf of an enterprise will be deemed to exercise an authority to conclude contracts on behalf of the enterprise.

Business profits (Article 7)

In addition to the traditional clauses of Article 7, “Business Profits,” the Treaty states that premiums for insurance and reinsurance policies may be taxed in the other State in accordance with its local laws.

The applicable rate may not exceed 5% of the premiums gross amount in the case of reinsurance policies and 10% of the premiums gross amount in all other cases.

Dividends (Article 10)

Like all other Treaties executed by Chile, the Chile – Australia Convention has the so called “Chile clause” under which a reduced rate does not apply to dividends distributed from Chile, provided that the first category tax is fully creditable to withholding tax.

Royalties (Article 12)

This Treaty has enlarged the meaning of the term royalties to include the supply of information concerning technical, industrial, commercial or scientific experience. It also includes any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of: (i) copyright; (ii) patents, trademarks, designs or models, plans, formulas; (iii) industrial, commercial or scientific equipment; (iv) information concerning technical, industrial, commercial or scientific experience.

Total or partial forbearance for the use or supply of any property or right referred to in Article 12, will also be regarded as a royalty.

Alienation of property (Article 13)

In addition to the traditional clauses related to capital gains, according to the Treaty, income derived by a resident of a Contracting State from the alienation of stocks, comparable interests or other rights that represent, directly or indirectly, immovable (real) property in more than 50% of their value, situated in the other Contracting State, may be taxed in that other State.

Exchange of information (Article 26)

As established in the Treaty, the authorities of both Contracting States will exchange relevant information with the purpose of enforcing the provisions therein.

Limitation of benefits (Article 27)

Article 27 regulates the limitation of benefits provided in the Treaty.

According to Article 27, if a person’s main purpose for creating or assigning dividends, interest or royalties is to take advantage of the benefits under the Treaty, Articles 10, 11 and 12 will not apply.

Therefore, in connection with the provisions of Article 74, No. 4 of the Chilean Income Tax Act, the Treaty requires taxpayers that remit incomes abroad to produce evidence of the effective beneficial owner of those incomes or amounts, submit the relevant certificate of residence and certificate stating they have no PE in Chile.

Entry into force (Article 29)

In Chile, the Treaty will enter into force for taxes on income obtained and amounts paid, credited to an account, put at the disposal or accounted as expenses, on or after 1 January following the date of the Treaty entry into force, i.e., 1 January 2014.

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